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February 27, 2013

Mixed Signals Give Gold Investors Whiplash

Goldman Sachs declares an end to 12-year run-up of gold, just before Bernanke reaffirms monetary easing

What is going on with gold? While it is normal for opinion to be divided on the merits of an investment—that’s why there are buyers and sellers—sharply contrasting trends seem to be giving gold investors whiplash.

The price of gold Wednesday is hovering over $1,600 an ounce, having fallen more than 1% on the day. Investors may be reacting to a Goldman Sachs report released Monday that declared the 12-year run the commodity has enjoyed to be finally over.

The influential investment firm cut its 3-month forecast steeply to $1,615 an ounce from $1,825, and its 12-month price target to $1,550 from $1,800, Bloomberg reports.

Yet gold futures had a banner day Tuesday, soaring nearly 2%, their biggest gain of the new year—a day after Goldman issued its report. Did investors not believe the behemoth bank but are having second thoughts today?

Recent mixed signals may account for the zigzagging. Gold tends to rise on bad economic news, and fall on positive news.

The Goldman report was all about a strengthening of the economy and also placed particular emphasis on the minutes of the Federal Open Market Committee’s meeting last month, which were made public last week.

Several committee members advocated a slowing of Federal Reserve asset purchases. The Fed, as part of its third round of quantitative easing, is buying bonds at a rate of $85 billion a month.

“Our economists believe that the downside risks to their forecasts have diminished while the uncertainty about the size of QE3 is high. We believe that a shift has occurred over the past few months with conviction in holding gold waning quickly.”

Yet, despite this warning, and the report’s noting that large investors like George Soros have cut their gold ETF holdings, Fed chairman Ben Bernanke did not play along.

In testimony before a Senate panel Tuesday (and again before a House committee Wednesday), Bernanke offered a full-throated defense of monetary easing, buoying equity and gold prices Tuesday (though just equity prices on Wednesday.)

As one investment executive told Reuters, "It doesn't matter what the Fed minutes tell you, he [Bernanke] is going to keep refilling the punch bowl until we get unemployment down below 6%."

So, on the one hand, Goldman Sachs issued a bearish report declaring “the turn in the gold cycle has likely already started.” That report cited rising consumer confidence, a recovery of the long-battered real estate market and other upbeat economic trends.

On the other hand, the Fed chairman reaffirmed his commitment to monetary stimulus to support a still-weak economy while elections in Italy brought to power an anti-austerity coalition, signaling the possibility of renewed economic crisis in Europe, both of which are bullish for gold.

While Goldman’s viewpoint went beyond short-term market movements, boldly declaring an end to the secular run-up in the precious metal, for every seller there is always a buyer. On the same day Goldman issued its report, U.S. Global Investors’ Frank Holmes wrote in his weekly commentary about Macquarie Research’s finding that the correlation between the Fed’s balance sheet and the price of gold is quite high, at 0.93.

“The firm found that for every $300 billion expansion in the balance sheet of the U.S. government, there was a $100 an ounce increase in the price of gold," Holmes writes. "When you factor in the Fed’s current bond purchases totaling $85 billion per month for the next nine months, the central bank will be adding $765 billion in new assets…By this measure alone, gold would rise approximately 16% over the next several months.”